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Flight Centre, Wotif, Webjet: Turbulence in the travel sector

If someone were to describe the business models of the following the travel companies to an investor, it wouldn’t be surprising if the investor was least keen on the company with an extensive network of physical stores and that had embarked on an expansive international roll-out of stores.

The investor’s concerns would likely include the threat of online competition and the lack of precedent for an Australian retailer to successfully expand overseas. The company I’m describing is of course Flight Centre (ASX: FLT), which has proven the sceptics wrong, time and time again.

Compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), which is up 14.5% in the past 12 months, Flight Centre’s shares have soared 88%. Meanwhile Wotif.com  (ASX: WTF) and Webjet (ASX: WEB), which both operate in the online travel space and which many investors would expect to be outperforming Flight Centre, have actually returned 13% and -20% respectively.

As the recent full year results showed, Flight Centre appears to be ‘travelling’ much better. After reporting growth for financial year 2013 of 8.7% in revenue and 20% in underlying net profit after tax there is no doubt that Flight Centre’s business is firing. The strong results also led to a big increase in the dividend which rose from 112 cents in FY 2012 to 137 cents in FY 2014. The firm can also boast of a rock-solid balance sheet with $388 million in net cash.

The outlook for Flight Centre continues to look good too. The company has provided guidance to the market that it expects to grow results at close to double digits in FY 2014.

Wotif can boast of selling one-in-10 accommodation nights in Australia, however this level has remained constant for four years now, suggesting little headway in gaining market share. The firm has historically been a provider of hotel rooms but Wotif is now utilising its network to sell flights, with the company reporting a pleasing 17.5% increase in flight sales.

In terms of revenues and profits though, Wotif wasn’t able to match Flight Centre in the growth stakes. The firm recorded growth in revenues of just 0.9% while net profit after tax actually fell 12%. Correspondingly Wotif reduced its dividend from 25 cents per share (cps) in FY 2012 to 23 cps in FY 2013.

Lastly, Webjet reported that normalised revenues increased 15.3% year-on-year while normalised net profit after tax grew a milder 5.6%. With approximately $30 million in net cash, the balance sheet is in good shape; however the expanded capital base meant the Board declared a dividend on 13 cps, which was flat year-on-year. The addition of hotels and further expansion into the business travel space will see Webjet providing a more rounded and competitive offering going forward.

Foolish takeaway

Flight Centre is an important reminder that companies that remain on the frontfront and adapt can still prosper – a lesson that it may be too late for newspaper publishers to learn. While Wotif and Webjet were previously priced for fast growth — which they have not delivered — their current share prices are starting to look a little more enticing and could be worth a place on your watchlist.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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